Business Segment Information

Following the completion of our strategic review, in December 2014, we reorganized our business into three segments in order to focus on core strengths in technology and consulting, engineering and construction, and government services. We also reorganized the businesses that we intend to exit into our Non-strategic Business segment because they no longer constitute a part of our future strategic focus. Each business segment reflects a reportable segment led by a separate business segment president who reports directly to our chief operating decision maker ("CODM"). Business segment performance is evaluated by our CODM using gross profit (loss), which is defined as business segment revenues less the cost of revenues, and includes overhead directly attributable to the business segment. We have revised our business segment reporting to reflect our current management approach and recast prior periods to conform to the current business segment presentation.

Our business segments are described below.

Technology & Consulting ("T&C"). Our T&C business segment combines proprietary KBR technologies, knowledge-based services and our three specialist consulting brands, Granherne, Energo and GVA, under a single customer-facing global business. This business segment provides licensed technologies and consulting services throughout the oil and gas value chain, from wellhead to crude refining and through to specialty chemicals production. In addition to sharing many of the same customers, these brands share the approach of early and continuous customer involvement to deliver an optimal solution to meet the customer’s objectives through early planning and scope definition, advanced technologies, and project lifecycle support.

Engineering & Construction ("E&C"). Our E&C business segment leverages our operational and technical excellence as a global provider of engineering, procurement, construction ("EPC"), commissioning and maintenance services for oil and gas, refining, petrochemical and chemical customers. E&C is managed on a geographic basis in order to facilitate close proximity to our customers and our people, while utilizing a consistent global execution strategy.

Government Services ("GS"). Our GS business segment focuses on long-term service contracts with annuity streams, particularly for the United Kingdom ("U.K."), Australian and United States ("U.S.") governments.

Non-strategic Business. Our Non-strategic Business segment represents the operations or activities that we intend to either sell to third parties or exit upon completion of existing contracts.

Other. Our Other business segment includes our corporate expenses and general and administrative expenses not allocated to the business segments above and any future activities that do not individually meet the criteria for segment presentation.

The following table presents revenues, gross profit, equity in earnings of unconsolidated affiliates and operating income (loss) by reporting segment.

Operations by Reportable Segment



	Three Months Ended June 30,						Six Months Ended June 30,
Dollars in millions	2015			2014			2015			2014
Revenues:
Technology & Consulting	$	80		$	100		$	152		$	191
Engineering & Construction	953			1,213			1,930			2,350
Government Services	158			163			313			349
Other	—			—			—			—
Subtotal	1,191			1,476			2,395			2,890
Non-strategic Business	190			183			422			402
Total Revenues	$	1,381		$	1,659		$	2,817		$	3,292
Gross profit (loss):
Technology & Consulting	$	21		$	15		$	40		$	30
Engineering & Construction	52			33			107			62
Government Services	(1		)	(1		)	(5		)	4
Other	—			—			—			—
Subtotal	72			47			142			96
Non-strategic Business	2			(19		)	2			(29		)
Total Gross profit	$	74		$	28		$	144		$	67
Equity in earnings of unconsolidated affiliates:
Technology & Consulting	$	—		$	—		$	—		$	—
Engineering & Construction	40			20			61			37
Government Services	13			29			27			43
Other	—			—			—			—
Subtotal	53			49			88			80
Non-strategic Business	—			—			—			—
Total Equity in earnings of unconsolidated affiliates	$	53		$	49		$	88		$	80
Segment operating income (loss):
Technology & Consulting	$	20		$	15		$	37		$	30
Engineering & Construction	74			38			140			71
Government Services	10			27			19			43
Other	(36		)	(36		)	(64		)	(80		)
Subtotal	68			44			132			64
Non-strategic Business	28			(19		)	28			(29		)
Total Segment operating income	$	96		$	25		$	160		$	35

Prior Period Adjustment

During the second quarter of 2015, we corrected a cumulative error related to transactions between the unconsolidated affiliates associated with our Mexican offshore maintenance joint venture within our E&C business segment. The cumulative error occurred throughout the period 2007 through the first quarter of 2015 and resulted in a $15 million favorable impact to "equity in earnings of unconsolidated affiliates" on our condensed consolidated statements of operations for the three and six months ended June 30, 2015. We evaluated the cumulative error on both a quantitative and qualitative basis under the guidance of ASC 250 - Accounting Changes and Error Corrections. We determined that the cumulative impact of the error did not affect the trend of net income, cash flows or liquidity and therefore did not have a material impact to previously issued financial statements. Additionally, we do not expect our consolidated financial statements for the current annual period to be materially impacted by the error correction.

Changes in Estimates

There are many factors that can affect the accuracy of our cost estimates and ultimately our future profitability, including, but not limited to, the availability and costs of resources, including labor, materials and equipment, productivity and weather, and for unit rate and construction service contracts, the availability and detail of customer supplied engineering drawings. In the past, we have realized both lower and higher than expected margins and have incurred losses as a result of unforeseen changes in our project costs. We recognize revisions of revenues and costs in the period in which the revisions are known. This may result in the recognition of costs before the recognition of related revenue recovery, if any. However, historically, our estimates have been reasonably dependable regarding the recognition of revenues and profit on percentage of completion contracts.

Significant changes in estimates periodically result in the recognition of losses on a particular contract. We generally believe that the recognition of a contract as a loss contract is a significant change in estimate. Activity in our reserve for estimated losses on uncompleted contracts, which is a component of "other current liabilities" on our condensed consolidated balance sheets, was as follows:



	Six Months Ended June 30,
Dollars in millions	2015			2014
Balance at January 1,	$	159		$	109
Changes in estimates on loss projects	(6		)	50
Change due to progress on loss projects	(80		)	(32		)
Balance at June 30,	$	73		$	127

Included in the reserve for estimated losses on uncompleted contracts is $52 million as of June 30, 2015 and $80 million as of January 1, 2015 related to two power projects in our Non-strategic Business segment, which we recognized as loss contracts during the three months ended December 31, 2014. During the three and six months ended June 30, 2015, there were no significant changes in our estimates of losses on these two projects. Our estimates of revenues and costs at completion for these power projects have been, and may continue to be, impacted by our performance, the performance of our subcontractors, and the U.S. labor market. Our estimated losses at completion as of June 30, 2015 on these power projects represent our best estimate based on current information. Actual results could differ from the estimates we have used to account for these power projects as of June 30, 2015.

Included in the reserve for estimated losses on uncompleted contracts is $11 million as of June 30, 2015 and $53 million as of January 1, 2015 related to our Canadian pipe fabrication and module assembly projects. During the three and six months ended June 30, 2015 we recognized favorable changes in estimates of losses on these projects of $18 million and $16 million, respectively, primarily due to negotiated settlements. During the three and six months ended June 30, 2014, we recognized unfavorable changes in our estimates of losses at completion on these projects of $41 million and $82 million, respectively. We have completed or substantially completed close-out activities on five of these projects and we are in negotiations to close out the remaining two projects, which we expect to occur by the end of 2015. Our estimates of revenues and costs at completion on these projects have been, and may continue to be, impacted by our performance, the performance of our subcontractors, the Canadian labor market, the nature, complexity and ultimate quantities of modules and types of individual components in the modules, our contractual arrangements and our ability to accumulate information and negotiate final contract settlements with our customers. Our estimated losses as of June 30, 2015 on these projects represent our best estimate based on current information. Actual results could differ from the estimates we have used to account for these projects as of June 30, 2015.

Restructuring

Included in "other current liabilities" on our condensed consolidated balance sheets at June 30, 2015 and December 31, 2014 are $17 million and $21 million, respectively, representing unpaid termination benefits related to our workforce reduction which was announced as a part of our strategic reorganization. The balance at June 30, 2015 includes an additional $11 million of unpaid termination benefits recognized within our E&C and Non-Strategic Business segments.

Dispositions

On June 30, 2015, we closed on the sale of our Building Group subsidiary to a subsidiary of Pernix Group, Inc., for consideration of $23 million, net cash proceeds including working capital adjustments and the assumption of some liabilities. The sale of the Building Group within our Non-strategic Business segment is consistent with our restructuring plans announced in December 2014. The disposition resulted in a pre-tax gain of approximately $28 million in the three and six months ended June 30, 2015 and is subject to future adjustments resulting from the finalization of the closing balance sheet.

Subsequent Events

On July 6, 2015, we announced our agreement to enter into two new strategic partnerships with Bernhard Capital Partners ("BCP"). The first partnership will be a new, equally owned and managed limited liability company named Brown & Root Industrial Services. We will contribute our E&C business segment's Industrial Services Americas business, which will continue to offer maintenance services, turnarounds and small capital expenditure projects. BCP will contribute its WINK Engineering business, which specializes in maintenance and engineering design services to the refining, chemical/petrochemical, and bulk storage terminal industries. In the second partnership, EPIC Piping, a BCP portfolio company, plans to acquire KBR's Canadian pipe fabrication facility. KBR will become a minority limited partner in EPIC Piping and will enter into an alliance agreement with EPIC Piping for certain pipe fabrication services. We expect to receive approximately $32 million in net cash proceeds from the two transactions which are expected to close prior to year end 2015.